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The American Prospect - articles by authorenThe Upside of Unemployment Insurancehttp://prospect.org/article/upside-unemployment-insurance
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"><p>To many economists, the unemployment insurance system is, at best, a necessary evil: The system helps laid-off workers survive hard times, but at the cost of economic efficiency. Unemployment benefits, the argument goes, reduce the incentive that unemployed workers have to seek and accept new jobs. &#13;</p>
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<p>But a new study concludes that the nation's unemployment insurance system may actually improve economic efficiency. Economists Daron Acemoglu, of the Massachusetts Institute of Technology, and Robert Shimer, of Princeton University, argue that financially pressed workers are too quick to take low-skill, low-wage jobs. For the economy to operate at peak efficiency, workers should be investing additional time and effort into finding better-paying jobs that take advantage of their particular skills.&#13;</p>
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The research suggests that the current unemployment insurance system is too stingy. A modest increase in the system's generosity would raise workers' wages and the overall production of goods and services, according to Acemoglu and Shimer. Moreover, any reductions in unemployment insurance from its present level, the researchers conclude, "would not only decrease the welfare [of the unemployed] but also reduce the level of [economic] output."&#13;</p>
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</div></div></div>Wed, 19 Dec 2001 19:14:25 +0000140572 at http://prospect.orgJohn SchmittCooked to Orderhttp://prospect.org/article/cooked-order
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"><p><font class="nonprinting"><font size="+3">T</font>his is the story of how the fast food industry and its conservative allies sought to discredit two distinguished economists, and how the attack backfired. The economists in question committed the sin of conducting research that challenged the conventional view of the minimum wage. Their attackers may have committed rather cruder sins. </font></p>
<p><font class="nonprinting">Almost every introductory economics textbook warns that raising the minimum wage will cost jobs. Assuming a standard model of the labor market, the reasoning is a straightforward variant of the law of supply and demand: If you raise workers' wages, you increase the price of labor—and firms will naturally hire fewer workers. </font></p>
<p><font class="nonprinting">But in fact recent data provide little support for the theory. Over the last decade or so, as the after-inflation value of the minimum wage has fallen close to a 40-year low, most economic research has found no connection between minimum-wage increases and levels of employment. </font></p>
<p><font class="nonprinting">In 1994, two well-respected Princeton economists, David Card and Alan Krueger, published an unusually convincing study. The Card-Krueger study, later included as a chapter in their book, <i>Myth and Measurement</i>, used the 1992 increase in New Jersey's minimum wage as a natural experiment. There had been no such increase in neighboring Pennsylvania. Standard theory would predict that New Jersey's 19 percent increase would cost jobs. But nothing of the sort happened. </font></p>
<p><font class="nonprinting">Like several earlier studies in Texas, California, and the United Kingdom, the New Jersey data suggested that minimum-wage increases, in some circumstances, might actually increase employment. How? Labor markets are not exactly like product markets. Wage levels can influence how hard people work and how often they quit. Pay people more, and they might work harder or display lower rates of turnover. So a higher minimum wage might raise productivity and lower recruiting and training expenses that would offset its costs. </font></p>
<p><font class="nonprinting">For proponents of the minimum wage, the Card-Krueger study provided a novel argument in support. Traditional arguments for raising the minimum wage cited several benefits: increasing the incomes of the working poor, boosting the wage floor for all workers, stimulating demand in the economy, and rewarding work. If there were mild job losses, these could be made up in other ways. But now, evidently, raising the minimum wage (within limits) might even be a job-creation program. </font></p>
<hr /><h3><font class="nonprinting">FOOD-FIGHT ECONOMICS</font></h3>
<p><font class="nonprinting">The clash between theory and the real world set off nothing short of a brawl within the economics profession, especially because the Clinton administration cited the research as evidence to support its proposed increase in the federal minimum wage from $4.25 to $5.15 per hour. Opponents of the minimum wage, led by conservative economists and low-wage employers, responded with a no-holds-barred assault against the new research in such influential forums as the <i>Wall Street Journal</i>, the <i>Washington Post</i>, and <i>Business Week</i>. </font></p>
<p><font class="nonprinting">No one took more public abuse from the anti-minimum-wage forces than Card and Krueger did. The Card-Krueger study drew attention both because of the stature of its authors and because of the meticulous care of their research. Both are prolific, highly respected economists with tenure in a top economics department. In his early thirties, Krueger took a leave from Princeton to serve as chief economist in Robert Reich's Labor Department. In 1995, the American Economics Association (AEA) selected Card to receive the John Bates Clark medal, given every two years to the best economist under the age of 40. </font></p>
<p><font class="nonprinting">The study itself was innovative and careful, and exemplified high professional standards in research design and implementation. Prior to the New Jersey study, the usual practice in minimum-wage research was to compare statistical variations in employment with variations in the real value of the minimum wage over time, an approach fraught with technical problems. While economists usually rely on government data collected for other purposes, Card and Krueger undertook their own major telephone survey of fast food restaurants in New Jersey and Pennsylvania. </font></p>
<hr size="1" /><center><font class="nonprinting"><a href="/subscribe/"><img alt="Subscribe to The American Prospect" border="0" src="/tapads/mini_subscribe.gif" /></a> </font></center><br /><hr size="1" /><p><font class="nonprinting">Card and Krueger surveyed 331 fast food restaurants in New Jersey and 79 restaurants in eastern Pennsylvania, just before the April 1992 increase took effect. They then re-interviewed the same restaurants about eight months later, after the minimum wage rose in New Jersey. Using the Pennsylvania restaurants as a "control" group, Card and Krueger were able to estimate the employment impact of the minimum-wage hike by comparing employment changes in the two state samples. They found that employment actually grew more in New Jersey than in Pennsylvania, though the difference was not statistically significant using their best measure of the effects. </font></p>
<p><font class="nonprinting">In early 1995 a vicious counterattack began, substantially underwritten by the fast food industry. In March the Employment Policies Institute, the leading employers group opposing the minimum wage, unveiled a counter-study. Richard Berman, a lobbyist for restaurant companies and the executive director of the Employment Policies Inst itute, wrote a piece for the <i>Wall Street Journal</i>'s editorial page. He claimed to possess evidence from the payroll records of 71 fast food restaurants in New Jersey and Pennsylvania that directly contradicted Card and Krueger's telephone survey data. He alleged that Card and Krueger's data were "grossly inaccurate" and "worse than flawed." The more accurate payroll data, he said, demonstrated that employment fell in New Jersey as a result of the minimum-wage increase. To support his position, Berman cited a March 1995 research paper by economists David Neumark of Michigan State University and William Wascher of the Federal Reserve Board, to whom the Em ployment Policies Institute had made the data available for analysis. </font></p>
<p><font class="nonprinting">Berman's allegations kicked off a public op-ed and private whispering campaign to undermine the credibility of the study and the reputations of Card and Krueger. The <i>Washington Post</i>, the <i>New York Times</i>, and other publications repeated, generally as fact, Berman's claims about his own data as well as his critique of Card and Krueger. <i>Business Week</i>'s conservative commentator Paul Craig Roberts hit the low point, with a column devoted almost entirely to savaging David Card, a mild-mannered Canadian who assiduously avoids making policy pronouncements on the minimum wage. Roberts questioned "the quality of the review process at <i>The American Economic Review</i> [where the study was first published] and the rigor of the selection process for the awarding of the John Bates Clark Medal." He charged that "political correctness seems to have crept into the inner sanctum of the AEA, discrediting its scholarly journal and debasing its top prize." </font></p>
<p><font class="nonprinting">Of course, Berman's op-ed piece saw the light of day only because the standards for publishing "research" on the editorial page of the <i>Wall Street Journal </i>are considerably less stringent than at the <i>American Economic Review</i>. While Card and Krueger explain in excruciating detail how they identified and selected restaurants for inclusion in their sample—the heart of proper survey design—Berman to this day has not revealed how the Employment Policies Institute assembled its own, much smaller sample. </font></p>
<p><font class="nonprinting">Correctly drawn samples accurately describe the broader population and follow patterns well studied by statisticians. Improper or biased sampling design, however, leads to distorted results. For example, if Berman surveyed only firms that did poorly after the minimum-wage increase, or if only firms hurt by the wage hike took the time to respond, his results would be atypical and biased in favor of finding job losses. </font></p>
<p><font class="nonprinting">Much about Berman's piece was pure polemic. Even Berman's statement that telephone surveys are less reliable than payroll records is not as plausible as it seems. The opposite would be true if workers were being paid under the table. And why should telephone respondents systematically overstate employment growth in New Jersey, while consistently understating it in Pennsylvania? </font></p>
<hr /><h3><font class="nonprinting">HAVE IT YOUR WAY</font></h3>
<p><font class="nonprinting">Neumark and Wascher, the economists on whom Berman and the fast food industry relied, became uneasy. A careful reading of their paper revealed that the payroll data did not, in fact, differ much from Card and Krueger's. In one of two statistical tests, the Employment Policies Institute data showed no statistically significant loss of employment. In a second test, the job losses were only weakly significant by standard statistical criteria. </font></p>
<p><font class="nonprinting">Neumark and Wascher clearly recognized that the fuzzy results obtained with the Employment Policies Institute's small sample of restaurants would not convince most economists. They also felt obliged to answer concerns that the Employment Policies Institute, which they acknowledged in a later version of their study had "a stake in the outcome of the minimum wage debate," may have provided them with data that were "falsified so as to undermine [Card and Krueger's] results." They set out to verify the Employment Policies Institute data and, separately, to gather their own payroll data from a larger group of restaurants. </font></p>
<p><font class="nonprinting">Neumark and Wascher contacted those restaurants that supplied data to the Employ ment Policies Institute and checked the responses. They also conducted their own survey of restaurant payroll records in the same areas originally surveyed by Card and Krueger. In the end, Neumark and Wascher had a sample of 230 restaurants, 80 supplied by the Employment Policies Institute and 150 that they had gathered themselves. (Card and Krueger attempted to interview 473 restaurants and obtained responses from 410.) </font></p>
<p><font class="nonprinting">When Neumark and Wascher analyzed the Employment Poli cies Institute sample and their own sample separately, a funny thing happened. The slightly expanded Employment Policies Institute sample indicated that the minimum wage did have a significant negative impact on employment in New Jersey (at least in one of the two statistical tests). But Neumark and Wascher's own data found no statistical difference in employment growth in the two states. Quite unintentionally, Neumark and Wascher had vindicated Card and Krueger. </font></p>
<p><font class="nonprinting">Neumark and Wascher scrambled to explain their results. They maintained that the combined data provided the best basis for determining the employment effects. But their position was undermined by major differences in the two samples. The Employment Policies Institute restaurants showed much more uniform employment changes than those in the Neumark and Wascher sample. In fact, basic statistical tests demonstrated convincingly that the Neumark and Wascher sample showed so much more variation in employment changes across restaurants that it was highly unlikely that the two samples were chosen randomly from the same population of restaurants. Since the samples were either not random or not from the same population, Neumark and Wascher would be wrong to lump them together. </font></p>
<p><font class="nonprinting">The irony is sweet. Neumark and Wascher, the two experts used by the fast food industry to impeach Card and Krueger, effectively ratified them. Neumark and Wascher's own original work also leaves one wondering about the Employment Policies Institute's data. </font></p>
<p><font class="nonprinting">There are two ways to resolve that issue. The first is through a full account of how the Employment Policies Institute gathered its data. But neither the Institute nor Neumark and Wascher have so far provided such an account. The second is a direct analysis of the Employment Policies Institute and Neumark and Wascher samples by all parties in the debate. But the most outrageous feature of the whole attack on the New Jersey study is that it has been waged entirely with a "secret data set." While Card and Krueger have shared their data with Neumark and Wascher and any other interested parties (it is posted on the Internet), the Employment Policies Institute and Neumark and Wascher have turned down all requests to make their data available to the public or even to Card and Krueger, despite Richard Berman's assurance in a <i>Washington Times </i>op-ed last summer that the data would be made public in July 1995. </font></p>
<hr /><h3><font class="nonprinting">DEEP FRIED</font></h3>
<p><font class="nonprinting">The fast food industry and their conservative allies have cooked up a whopper. But when the statistics settle, where does the debate on the employment effects of the minimum wage stand? Despite the attacks on Card and Krueger, or perhaps because of them, the economics profession has shown some signs of accepting the notion that moderate increases in the minimum wage may have little or no effect on employment. In October, 101 economists, including three Nobel laureates and four other past presidents of the American Economics Asso ciation, signed a letter calling for a 90 cent increase in the minimum wage. They stated their belief that a moderate increase would not "significantly jeopardiz[e] employment opportunities." </font></p>
<p><font class="nonprinting">A panel discussion on the minimum wage at the most recent American Economics Association annual conference also showed progress. Even critics contended that a 10 percent minimum-wage increase would reduce employment only by, at most, about 3 percent—a more modest claim than in previous years. That might still seem like a lot, but think of it this way: If the minimum wage rose by 20 percent, 94 out of 100 minimum-wage workers would get a 20 percent pay increase, while 6 out of 100 would "lose their jobs." Since most minimum-wage jobs have a high turnover, it is unlikely that 6 out of 100 workers would be fired. More likely, employers would fail to fill a certain number of vacancies when the current employees left. With fewer vacancies, those looking for minimum-wage work would have to wait a little longer to find work—on average, 6 percent longer. But, once they found a minimum-wage job, it would pay 20 percent more. On an annual-income basis, minimum-wage workers would still come out 14 percent ahead. </font></p>
<p><font class="nonprinting">Further, given that minimum-wage jobs also tend to be more flexible than most, employers could also compensate for higher wages by cutting hours worked by 6 percent. If this were the case, minimum-wage earners would work fewer hours (about an hour less on a 20-hour week) but make 20 percent more for each hour worked. They would work fewer hours, but their weekly pay would go up by 14 percent. (The most recent version of Neumark and Wascher's New Jersey study provides some evidence that firms behave in just this way.) This is the arithmetic that explains the overwhelming support that low-wage workers voice for regular and reasonable increases in the minimum wage. </font></p>
<p><font class="nonprinting">A recent op-ed in the <i>Wall Street Journal</i> by conservative economist Robert Barro suggests a tactical retreat and a new set of arguments from an odd quarter. Barro concedes that "[w]hile the net negative effect on employment is small," minimum wages lead to "disturbing compositional changes." Citing other research by Neumark and Wascher, he argues that a higher minimum wage would induce "more advantaged," "nonblack/non-Hispanic" teenagers to drop out of high school in order to work full time at the new, higher wage. These dropouts would presumably displace "more disadvantaged, notably black and Hispanic" workers who now hold those jobs. </font></p>
<p><font class="nonprinting">Note the sublime irony of this argument. Barro, who made his name in economics by asserting the pure rationality of individuals, is now claiming that advantaged white teenagers will volunteer to be branded "high school dropouts" for the rest of their working lives, in exchange for an extra 90 cents an hour. That hardly sounds rational. </font></p>
<p><font class="nonprinting">So we have made some progress after all. Opponents of the minimum wage are having to resort to ever more far-fetched arguments. The honor of Professors Card and Krueger has been restored. Their attackers are on the defensive as statistical short-order cooks. And more than a few mainstream economists seem newly willing to entertain the concept that it is efficient for work to pay a living wage. </font></p>
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</div></div></div>Wed, 19 Dec 2001 18:48:05 +0000141247 at http://prospect.orgJohn SchmittHealth Care and the Entrepreneurial Spririthttp://prospect.org/article/health-care-and-entrepreneurial-spririt
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"><p>Free markets are supposed to have made the United States the world's most fertile ground for entrepreneurial activity. So how come only about 8 percent of Americans are self-employed, compared with much higher self-employment rates in countries alleged to suffer from "Eurosclerosis?" The United States, for example, trails Belgium (15 percent), France (11 percent), Germany (10 percent), Italy (24 percent), the Netherlands (11 percent), Spain (21 percent), Sweden (11 percent), and the United Kingdom (12 percent).</p>
<p>Are Europeans just naturally more entrepreneurial than we are? Possibly, but recent research by economist Alison Wellington, of the College of Wooster, suggests that the higher self-employment rates in Europe may be due to the continent's predilection for universal health care coverage.</p>
<p>Wellington has observed that, in the United States, spouses of workers with employer provided health insurance coverage were 7-14 percent more likely to be self-employed than were spouses of workers who didn't have work-related health benefits. Her estimates suggest that "universal spousal coverage" would raise the share of self-employed workers by about 7 percentage points--putting the United States right in the middle of the European range. "The lack of a (relatively) inexpensive source of health care would seem to be a deterrent to starting a business," says Wellington.</p>
</div></div></div>Fri, 07 Dec 2001 21:10:53 +0000142307 at http://prospect.orgJohn SchmittMinimum Wage Careershttp://prospect.org/article/minimum-wage-careers
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"><p>Business opponents of the minimum wage often argue that it is little more than an "entry-level" wage--water-wings for those workers taking their first dip in the labor pool--and therefore needn't be high enough to sustain a worker over many years. A recent study by two government economists, William Carrington at the Bureau of Labor Statistics and Bruce Fallick of the Federal Reserve Board, however, has found that a significant number of new workers stay at or near the minimum wage long after their initial foray into the labor market.</p>
<p></p><p>"Minimum Wage Careers?" followed young people for up to 10 years after they finished school and found that while the minimum wage had little or no effect on the careers of most workers, a "non-trivial fraction of workers ... spend substantial portions of their post-school career on minimum or near-minimum wage jobs." Ten years into the work world, 13.2 percent of all workers had spent half or more of their careers within $1.50 of the minimum wage.</p>
<p>Not surprisingly, women and blacks--who are overrepresented at the low end of the labor market--are much more likely to end up in a "minimum wage career." About one in six blacks and about the same share of women spent half or more of their first 10 working years in jobs paying at or near the minimum wage. Thus legislation affecting the minimum wage can have, according to Carrington and Fallick, "non-negligible effects on the lifetime opportunities of a significant minority of workers." It remains to be seen whether this finding will spur Congress to nudge the minimum wage higher than its current $5.15 an hour.</p>
</div></div></div>Fri, 07 Dec 2001 20:46:46 +0000142321 at http://prospect.orgJohn SchmittThe Rise and Fall of Job Traininghttp://prospect.org/article/rise-and-fall-job-training
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<p>With unemployment at a 30-year low, opponents of current proposals to raise the minimum wage by a dollar to $6.15 an hour will be hard-pressed to argue such a move will cost low-wage workers their jobs. But what about that other stock argument that a higher minimum will reduce training for low-wage workers? &#13;</p>
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New research by MIT economists Daron Acemoglu and Jörn-Steffen Pischke casts doubt on that claim. The researchers noticed that training for low-wage workers fell substantially during the 1980s--a period when the inflation-adjusted value of the minimum wage plummeted. Why didn't the wage decline allow employers to invest more in training?&#13;</p>
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Since other factors could have been at play, Acemoglu and Pischke designed a test. They followed a sample of low-wage workers over the period 1987-1992, a time when the federal government and some states increased minimum wages. The economists then compared training outcomes across states with different minimum wage levels.&#13;</p>
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They found "almost no evidence of reduction in training in response to minimum wages." In fact, when Acemoglu and Pischke focused on the lowest-wage workers, the data indicated that, if anything, training was slightly higher where the minimum wage was also higher (though the results were not statistically significant).&#13;</p>
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Acemoglu and Pischke offer a reasonable explanation. Though economics textbooks may speak of labor markets as "perfectly competitive," in the actual world markets are far from perfect. Employers, for example, often face trouble filling vacancies, motivating their workers, and retaining their best workers even when they pay higher wages. So raising the minimum wage can lead employers to invest <i>more</i> in the skills of their employees. It sometimes can be more profitable for employers to train workers up to their new wage level than to look for new workers.&#13;</p>
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</center></div></div></div>Wed, 05 Dec 2001 23:33:30 +0000141749 at http://prospect.orgJohn Schmitt